Betting on One Big Change
Jeff Bezos has a famous quote about betting on things that will remain the same. In twenty years, what are the chances customers will care about quick delivery? Very high, so any investment in that capability from Amazon is likely to still payoff in the distant future.
I love that framework as a way of focusing on what Clayton Christensen would call sustaining innovations. It is a great way to improve an existing product or service.
But what about creating something new? You have to overcome the initial inertia of skeptical investors, employees, and customers. You need to be 10x better than current alternatives, not just marginally better.
The easiest way to do that is make a big bet on some emerging shift in the world. Amazon has also made those as well. The initial online marketplace was a bet that bandwidth will increase, and time online expand exponentially. Investing in massive warehouses and low-churn inventory would only make sense if a large number of people spent a large number of hours shopping online.
It seems obvious now, but when the company started in 1994 we had dial-up service and low online penetration. Bezos had conviction in one big idea. Here's a great interview here from 1997 describing his thinking. Amazon is not alone. Many great companies made one big bet.
Salesforce started in 1999. Was it obvious then that companies would trust online software for critical customer relationship management? Here’s a CNN article from that same year announcing AOL’s proposal to move its 15M customers past dial-up connection speeds for the first time.
Imagine the foresight to start Salesforce at a time when the largest internet provider (with 15M users!) was just moving past dial-up. Or, creating Netflix two years before then. Apple opened the App Store in July 2008, when there were less than 25M smartphones in the world.
In fact, many successful companies are successful not because they break new ground in what the business does, but in when they make their big move. It is the timing of the bet that matters. Look at some other examples of a focused long term bet:
- Tesla - The company (from the beginning) was premised on the thesis that battery costs would drop to enable electric cars to be cheaper than gas. The founders believed customers wanted products that move us from a carbon based economy, way ahead of where we are today in the climate change debate.
- Whole Foods - Organic was niche and expensive when the company was founded in 1980. The founders bet on the long term movement toward healthier eating. They plugged away for two decades, then all the sudden Walmart moved organic, the company created billions of dollars in market cap and was bought by Amazon.
- Microsoft - in 1975, when the company started, it was far from clear software would be valuable to the average American. This was two years before the founder of DEC famously said “there is no reason anyone would want a computer in their home.”
Iconic businesses make one big bet on a long term market shift. It could be the progress of an enabling technology, the change in relative price of a key input, or the opening up of new and sustained customer demand for a ‘niche’ product.
These companies succeed because their early commitment to the trend allows them to build a brand and organizational capabilities inextricably linked to the market shift they anticipated. The trend either materializes, or it doesn't (Segway).
Looking at startups through this lens can be a valuable angel investing tool. It is also true that large trends open up pathways for many smaller companies, who do not end up global companies, but provide profitable opportunities for entrepreneurs. Consider the millions of people making money in the creator economy today.
What 25 year societal trend do you have conviction in?
Mine is that shareholder primacy has already been replaced by stakeholderism, but we still don't have the language, tools, and systems to efficiently allocate capital in the multidimensional world of purpose and profits. More to come here.